Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 198

Three drivers of attractive infrastructure opportunities

Infrastructure has become a hot topic in recent months. Donald Trump has promised a US$1 trillion infrastructure investment programme, while in Indonesia immediately to our north, the Joko Widodo administration has committed to a doubling of infrastructure spending in 2017 compared with 2014.

Locally, the national political debate is escalating on the adequacy of South Australian and east coast electricity generation capacity, and how we might meet any shortfall. The latest plan from Prime Minister Malcolm Turnbull explores a $2 billion expansion of the Snowy Hydro Scheme.

Increased investment in infrastructure is long overdue. This is true in both developed and emerging economies, and has become increasingly acute over the past 30 to 40 years. In the United States, for example, the recently released 2017 Infrastructure Report Card from the American Society of Civil Engineers (ASCE) gave America’s infrastructure an overall score of D+, stating:

“… our nation is at a crossroads. Deteriorating infrastructure is impeding our ability to compete in the thriving global economy, and improvements are necessary to ensure our country is built for the future”.

ASCE estimates US$4.6 trillion is needed in US infrastructure investment between now and 2025, of which they estimate approximately US$2.5 trillion is funded, leaving a massive funding gap.

The main factors driving the need for investment

Three main factors drive the escalating need for infrastructure investment around the world:

1. Long-term chronic underspend

A 2015 study by the B20 (the business arm of the G20) estimated that by 2030 approximately US$60-70 trillion will need to be spent on infrastructure around the world just to keep up with demand. It believes only US$45 trillion will be funded, leaving a gap of US$15-20 trillion.

This spend is largely to bring existing assets up to standard and keep pace with growth, and would offer little expansion in the infrastructure stock.

2. A growing middle class, especially in emerging economies

The growth of a substantial middle class in emerging markets will demand not only more but better infrastructure to complement their improved living standards and increased disposable income.

3. Governments with limited funding capacity

Historically governments have been the primary provider of national infrastructure. However, in the post-GFC world, many governments are running substantial fiscal deficits and have fragile, highly geared, national balance sheets. Their ability to invest in public sector infrastructure is highly constrained. In fact, the demand to improve infrastructure comes at a time when governments’ funding ability is at its weakest in a longtime.

Enter the private investor

Infrastructure assets possess a number of attractive investment characteristics including:

  • long dated, resilient and visible cash flows
  • regulated or contracted earnings streams
  • monopolistic market position or high barriers to entry
  • attractive potential yield
  • inflation hedge within the business
  • low maintenance capital spend
  • largely fixed operating cost base
  • low volatility of earnings.

These characteristics are ideally suited to both the listed and unlisted infrastructure markets where the quality and predictability of earnings are highly valued. The public, or listed, market also offers liquidity which allows entry into or exit from an investment more easily than in the unlisted market.

A current example in NSW is the State Government privatising its electricity assets with the proceeds to be recycled into new infrastructure investment. The Government is entering long-term leases of the energy businesses Transgrid, Ausgrid and Endeavour. The major purchasers of these assets have been superannuation and unlisted infrastructure funds, with some involvement from listed market investors.

Given the popularity of infrastructure assets amongst unlisted investors, demand currently far outstrips supply, meaning that investors in an unlisted fund can be waiting on the sidelines for some time before a suitable asset is secured by their fund, and their cash deployed for investment.

Regulated v user-pay assets

An important definition in the world of infrastructure investing is the distinction between regulated and user-pay assets.

Regulated assets are the typical essential service utility such as gas, electricity and water companies. Given the natural monopoly position they enjoy, a free market economy will typically ‘regulate’ the returns they can earn and rates they charge customers.

In contrast, user-pay assets, such as airports, ports and toll roads, typically operate under the governance of a ‘concession deed’ with a government authority. It is this deed that determines the scope and scale of the business emanating from it.

This distinction offers a different investment profile. In the current environment of strong global growth, user-pay assets should do relatively better as they are better positioned to immediately benefit from increased demand and pass through any inflationary pressures. Alternatively, in an environment of sluggish global growth and falling interest rates, regulated utilities would be preferred as their defensive, safe haven characteristics become more highly valued by investors.

The global listed infrastructure market will grow rapidly over coming decades, along with its unlisted cousin. Public equity markets will form a crucial component in the funding solution for how the world meets its acute and rapidly growing infrastructure needs.

 

Greg Goodsell is Global Equity Strategist at 4D Infrastructure, a Bennelong boutique. This article is general information that does not consider the circumstances of any individual.


 

Leave a Comment:

     
banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.